Competition Bureau statement regarding the proposed acquisition by Leon's of The Brick

Position statement

OTTAWA, March 19, 2013 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition by Leon's Furniture Limited (Leon's) and/or its affiliates of The Brick Ltd. and its subsidiaries (The Brick), pursuant to an arrangement agreement announced on November 11, 2012.

On March 11, 2013, the Bureau issued a No Action Letter (NAL) to Leon's and the Brick indicating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act in respect of the proposed transaction.Footnote 1 The Bureau concluded that the proposed transaction was unlikely to lead to a substantial lessening or prevention of competition due to the existence of effective remaining competition from a number of national and regional competitors. In conducting its review of the transaction, the Bureau obtained information from Leon's and The Brick, including transaction-level sales data, strategic marketing documents, and business plans, as well as information from a large number of market participants, including competitors, suppliers, and commercial customers.

Background

The proposed transaction is a merger of two national retailers of furniture, mattresses, appliances and electronics. At the time that the transaction was announced, Leon's had 74 retail stores across Canada, in addition to three stores in Ontario operating under the Appliance Canada banner. The Brick had a total of 231 retail stores operating under four banners: The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick. The Bureau determined that the parties' retail operations overlapped in over sixty local markets across Canada.Footnote 2 Furthermore, through their respective affiliates, Appliance Canada and Midnorthern Appliance, Leon's and The Brick also compete in the wholesaling of appliances to commercial customers (e.g., developers, builders and managers of residential real estate projects) in Southern Ontario.

The Bureau found that the parties were particularly close rivals in the retailing of furniture and mattresses. The Bureau also found that there was a higher degree of differentiation between the parties and other competitors involved in the retailing of these products, as compared to the retailing of appliances and electronics.Footnote 3 As a result, the main focus of the Bureau's review was on determining whether the proposed transaction would create, maintain, or enhance the ability of the parties to exercise market power in the retailing of furniture and mattresses.

Information obtained by the Bureau over the course of its investigation revealed that The Brick and Leon's are close competitors, if not each other's closest competitors, with respect to the retailing of furniture and mattresses (in particular furniture). However, in order to assess the degree of direct competition between the parties with greater precision, the Bureau requested sales data at the transaction level from all Leon's and The Brick's stores. Using this data, the Bureau then conducted an econometric study, a natural experiment analysis called cross-sectional analysis. The purpose of this analysis was to quantify the competitive impact that the parties have on each other, and thereby estimate the potential loss in competition that might be expected to arise from the merger. As part of its analysis, the Bureau compared the parties' prices in areas where they compete against each other with prices in areas where they do not compete.Footnote 4 In doing this comparison, the Bureau controlled for other factors that affect demand and supply conditions across areas. These factors are:

  • area specific characteristics;Footnote 5
  • store specific characteristics;Footnote 6
  • product specific characteristics;Footnote 7
  • customer specific characteristics; and
  • the presence of other competitors.Footnote 8

In addition to this analysis, the Bureau assessed other sources of information on the level of competition between Leon's and The Brick. This included reviewing internal documents from both companies, considering the views of market participants, and analysing the impact that Leon's entry into a number of local markets had on the performance of The Brick's stores. As a result, the Bureau determined that the price effects it observed in its cross-sectional analysis were not material.

In coming to this determination on materiality, the Bureau considered guidance provided by the Competition Tribunal in a recent decision that magnitude is one of three dimensions of a competitive effect that need to be evaluated in establishing whether a competitive effect is material. Other relevant factors are scope and sustainability.Footnote 9 Furthermore, as indicated in the Merger Enforcement Guidelines, conclusions regarding whether a prevention or lessening of competition is substantial, are based on an assessment of factors that could have a constraining influence on price following the merger.Footnote 10 These factors include the degree to which barriers to entry exist, as well as the presence of effective remaining competition.

With respect to barriers to entry, the Bureau noted that scale provides a furniture and/or mattress retailer with certain cost advantages that are not enjoyed by smaller retailers, particularly with respect to procurement, advertising, and consumer financing programs. Furthermore, the Bureau's investigation revealed that the achievement of scale takes time and involves investments that cannot be recovered, not only in establishing a physical infrastructure, but more importantly in establishing a fully functioning retail network. Such a network consists of:

  • multiple store locations with high levels of customer traffic;
  • extensive supplier relationships that provide a wide range of products, and the opportunity to obtain exclusivities in respect of certain product lines; and
  • a well-established reputation supported by multi-channel advertising, advanced inventory management capabilities, and a high level of market expertise.Footnote 11

A number of market contacts also noted that finding and accessing viable real estate was an issue in certain areas.

With respect to effective remaining competition, the Bureau concluded that a number of national and regional retailers had overcome the barriers identified above, and that there would be sufficient effective competition to the merged entity in each of the local markets identified. The Bureau's conclusion on effective remaining competition is based not only on extensive market contacts and a review of the parties' internal documents, but also on an empirical analysis of the impact that each of a large number of national and regional furniture and/or mattress retailers have on the pricing of the parties.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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